Does Governance Have a Role in Pricing? Cross-Country Evidence from Bitcoin Markets

Abstract

I investigate the effects of social technologies related to governance on cross-country differences in Bitcoin prices. Investors pay a persistent premium over global prices in countries with less economic freedom, particularly when there exist foreign exchange and capital controls limiting investment freedom. Using the Heritage Foundation’s Economic Freedom Index and associated macroeconomic time-series, I find that a 10 point increase in the index leads to a 7.5 percent decrease in premium. Of the component indices, Financial Freedom has the largest marginal effect in that a 10 point improvement in its value decreases prices by 5.3 percent. From this perspective, Bitcoin can be seen as a disaster asset offering a new channel to evade domestic jurisdiction repression, a process resembling imperfect markets for catastrophe insurance inducing unexpectedly high premiums. Finally, a natural question arises as to whether this finding can be extended to other assets, in other words, whether endogenous social technologies effect systemic risk and manifest in the pricing kernel.

Keywords: international finance, asset pricing, foreign exchange, bitcoin, cryptofinance

JEL Classification: G15, G28